VIDEO: Starting In Shares

This video explains the basics behind investing in shares. Our ASX experts share insights into when, why and how you might use shares to form part of a diversified investment portfolio, where to find further information and what to look out for.

FAQs

What are shares?

When you buy shares in a company, you are buying a part of that company. This means you share in the company’s performance in the form of profits which can be given to you as dividends and/or capital growth through the value of your shares increasing. Companies generally list on the stock exchange to raise capital for their company and to create a market in their shares. Companies you invest in benefit by using your money and that of other investors to finance their business or its expansion, without having to borrow money.

Shares are an important part of an investment strategy. Being good at investing in shares is about being informed, monitoring your share’s performance on a regular basis, keeping an eye on your goals and investment strategy and participating in ongoing education as you need it. Shares may also be referred to as stocks, securities or equities.

What are the Risks and Benefits?

Investing in shares will make you part-owner of a business. Shares can be a sound long-term investment to build wealth over time but are very risky to use in the hope of making a quick buck.

Before you invest in shares, you should understand the benefits and risks, think carefully about your options and seek financial advice before you enter the market.

The benefits of investing in shares are:

  • Potential capital gains from owning an asset that can grow in value over time
  • Potential income from dividends
  • Lower tax rates on long-term capital gains

The risks of investing in shares are:

  • Share prices for a company can fall dramatically, even to zero
  • If the company goes broke, you are the last in line to be paid, so you may not get your money back
  • The value of your shares will go up and down from month to month, and the dividend may vary

Can I Borrow To Invest In Shares? Margin Loans Explained

A margin loan allows you to borrow money to invest. The margin loan is secured against the investment you make with it and/or other investments you have. You’re not allowed to borrow the full amount of your investments but just a percentage called the LVR – Loan to value ratio. This is usually between 30% and 70% of the value of your investment in shares or managed funds.

Using a margin loan, or borrowing to invest, can be a very effective strategy to build your wealth, but it’s not for everyone. You need to have excess income, be a savvy investor and happy to take risks. Because you’ve more money to invest, your investment gets a ‘turbo boost’ and gains are magnified. But if your investment loses money, losses are magnified too. Not only have you made a loss but you still have to pay back the loan. Be aware of borrowing to invest in a volatile share market environment, get financial advice and have a strategy in place for meeting a margin call.

RESOURCES & REFERENCES

EXERCISE

Flick through the ASX Investing in Shares Booklet. With a friend or in your GIG or online Money Makeover group, discuss shares. Use the points below as conversation sparks.

Approach – how and where to start

  • How much is a minimum amount needed to start investing in shares?
  • What online trading platforms exist? How do they work? eg. CommSec, E-E*trade, nabtrade…
  • What is trading? What kinds of trading is there? eg. define ‘day trading’, ‘options trading’
  • What is the difference between ‘trading’ and ‘investing?’
  • When is a good time to invest in shares?
  • How much does it cost to start? Online fees, full service brokerage fees
  • Why would you sell?

Discuss the following terms:

  • International vs Australian shares
  • Employee buy-in schemes
  • Reinvesting dividends (pros, cons, how to’s)
  • ‘Set and forget’

Ponder…

What does a share trading success story look like? Discuss good and bad attitudes and behaviours.

Want to know about ethical investing?

 

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